6 surprises hidden in the Credit CARD Act

By Lynnette Khalfani-Cox, CardRatings contributor

Updated, April 18, 2016

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No. 5 Most-Viewed CardRatings.com Article of 2011*

When the Credit Card Accountability, Responsibility and Disclosure Act was ushered into law, it was heralded as a way to protect consumers from unfair and deceptive practices by credit card issuers.

But while the new law provided some consumer benefits, many finer points of the CARD Act are complex and confusing at best. And consumer advocates say the Act contains enough loopholes to drive a truck through.

Here are six things about the CARD Act you might not know:

The law doesn't cap credit card interest rates

"People assume that the CARD Act put limits on interest rates that banks can charge, but that's not true," says Linda Sherry, a credit card expert with Consumer Action.

Sherry notes that while the best credit card deals are marketed to those with great credit scores, people with bad credit may find themselves at the mercy of credit card companies that can legally charge whatever the market will bear.

For instance, First Premier is now offering a credit card with a 49.9 percent interest rate. Even with the CARD Act, that's proof that interest rates "can get ugly," Sherry says, adding: "Obviously, such rates would only be charged for those with severely damaged credit or those who are big enough suckers to take the offer."

Banks can still raise your interest rates

Although the CARD Act generally prohibits banks from raising your interest rate in the first year after issuing a credit card, there are some major exceptions.

"A lot of consumers think their interest rates can't be raised at all in the first year," says Erik Larson, founder of NextAdvisor.com. "That's true for cards with fixed rates, but not for cards with variable rates," he says. And nowadays, the overwhelming majority of credit cards are variable-rate cards.

Under the law, for variable-rate cards, banks can include language in your credit card agreement that allows them to instantly--and without notice--increase your interest rate when it is tied to a publicly reported rate, such as the prime rate. Your rate can also increase if you're 60 days late paying your bill, Larson notes.

That 45-day notice of a rate hike really means 14 days

The CARD Act requires banks to give you 45 days' notice before a rate increase. But that requirement is highly misleading and is perhaps the least-understood provision of the law.

In a nutshell, that 45-day requirement actually refers to your payment due date, not the specific date of the rate increase.

Translation: If your credit card company does increase your rate, you have 45 days before you have to make a first payment at the new, higher rate. But the CARD Act technically gives credit card issuers the right to begin charging you that higher rate on new purchases as soon as 14 days after they've mailed you a notice about it.

"It's a very confusing aspect of the CARD Act," says Sherry.

The law can't truly prevent marketing to college students

Part of the CARD Act was designed to prevent credit card issuers from marketing aggressively to young people, many of whom realistically have no way to repay what they charge.

That's why individuals under 21 now have to demonstrate "sufficient" income or get a co-signer to obtain a credit card. Additionally, credit card issuers are banned from setting up tables on college campuses.

But Adrian Nazari, the CEO of CreditSesame.com, points out that efforts to restrict college marketing are easily thwarted in college towns nationwide.

"Now banks can't 'target' youth. So obviously if they go on a college campus they're targeting young adults," says Nazari.

"But what if a company goes next to a campus--say, a block or two away--and gives away freebies for filling out a credit card application?" he asks. "Guess what? Eighty percent of the people there will still be students. So banks can get around it," he says of the CARD Act.

Some loopholes will soon close

Effective October 1, 2011, Federal agencies will close several loopholes in the CARD Act by amending the law. One amendment will clarify that credit card companies are forbidden from imposing fees of all kinds--including penalty, "application" or "processing" fees--that exceed 25 percent of your initial credit limit.

Presently, the law references annual fees, but doesn't mention penalty fees or upfront costs a bank might charge before you even become a customer.

Another CARD Act amendment prohibits credit card issuers from basing credit decisions on a person's overall household income. Instead, lenders must evaluate only the income of the individual applying. This affects students and non-working spouses who could obtain new credit cards or higher credit lines based on a parent's earnings or a spouse's income. That strategy won't work in the future.

One good thing: Your credit card statement is easier to read

Over the past year or so, you've probably seen one big change to your credit card statements: a snapshot of how long it will take to pay off your debt if you only make minimum payments, versus how long it would take if you paid the balance in three years.

This snapshot was mandated by the CARD Act.

Says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling: "This has undoubtedly been an eye-opener for many consumers, and perhaps has led to the significant debt loads that have been paid off or down."

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